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Salameh: Better public finances can lift rating

BEIRUT: An improvement in the public finances would encourage rating agencies to reconsider their sovereign outlook on Lebanon and efforts should be more focused on changing this image, Central Bank Governor Riad Salameh told The Daily Star in an interview Wednesday.

“An effort is needed to give a better image of the public finances in the country. There are other elements that are taken into consideration that have a political and security nature,” Salameh added.

In May 2013, Moody’s affirmed Lebanon’s B1 government bond rating but changed the outlook to negative from stable.

And in November Standard & Poor’s changed Lebanon’s rating to B- with a negative outlook.

However, Salameh stressed that despite the negative ratings, the Finance Ministry and the Central Bank had no difficulty swapping all the maturing bonds in 2013 at reasonable rates and yields.

“The last declaration of the rating agencies was an indication that they now have a negative outlook of the country. The market did not react to the news and we are still seeing stability in the interest rates on our bonds,” Salameh explained.

He added that the credit default risk of the country did not increase, adding that Lebanon today was borrowing at a lower cost in terms of interest rates.

“We are borrowing in fact at levels that correspond with countries with B+ or even BBB. Nevertheless, we have to take these ratings seriously as they determine the behavior of the international players when they are looking at placing money in Lebanon. They also have a bearing on the capital weighing of the banks on their solvency ratios,” Salameh said.

The Central Bank chief also confirmed reports that the Finance Ministry would soon swap some $1.6 billion in maturing Eurobonds.

“The Eurobonds mature in April and May of this year. The ministry is now choosing the leading bank. There will be one international bank and two local banks that will co-manage the replacement. All this has to be completed before the maturing date in April 15.”

The governor also revealed that the entirety of the Eurobonds that would mature this year was just over $2 billion, noting that replacing them would not be a problem for Lebanon.

According to Salameh, Lebanon cannot exceed the $2 billion Eurobond ceiling unless the Parliament authorizes the Cabinet to issue more bonds this year.

The new Finance Minister Ali Hasan Khalil has not yet spelled out his financial policy as Cabinet ministers are still struggling to hammer out an acceptable ministerial statement.

Lebanese banks usually snap up most of the sovereign bonds issued by the government and Salameh stressed that local lenders had shown interest in swapping the bonds.

Salameh said he had urged the government and the Finance Ministry to reduce the deficit-to-GDP and debt-to-GDP ratios to help improve Lebanon’s credit rating.

“Lebanon passed through difficult moments. The politicians in charge of the country are aware of the challenges and we hope this issue can be addressed seriously,” he added.

He admitted that no major breakthrough in terms of economic growth could happen in the first or second quarters of this year due to the impending presidential polls and the election of a new Parliament.

Against this backdrop, Salameh has launched a number of initiatives to inject more cash into the market and to stimulate the economy, especially during these hard times.

“We have two initiatives this year. We have launched a credit enhanced program of $800 million in order to enhance housing projects and for energy saving,” he said.

“The other initiative involves banks investing 3 percent of their capital and the Central Bank will give them a guarantee of 75 percent of this investment. The idea is to promote the technology sector and help create startup companies.”

The second package will cost around $400 million.

Salameh emphasized that the initiatives that started in 2012 and 2013 had to some extent helped the GDP growth.

He expressed confidence that the new initiatives would help create more employment among youth and revive the economy in general.

“These packages are going to contribute to growth. The $1.4 billion package we launched in 2013 was utilized by 75 percent of its amount. If we consider that Lebanon had a growth of 2.5 percent in 2013, as was confirmed by our research department, the 1.5 percent out of the 2.5 percent is linked to the incentive package we did in 2013.”

Salameh defended the GDP growth estimate of the Central Bank, insisting that these estimates had been well studied by the research department.

The governor was responding to claims by some agencies that the growth in Lebanon did not exceed 1.5 percent.

Salameh reiterated that the Central Bank would continue its successful monetary policy.

“This policy has helped Lebanon. We now have a historic record of foreign currency reserves and we haven’t even included the gold reserves,” he said.

The foreign currency reserves at the Central Bank currently stand at $35 billion.

A version of this article appeared in the print edition of The Daily Star on March 06, 2014, on page 5.

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An improvement in the public finances would encourage rating agencies to reconsider their sovereign outlook on Lebanon and efforts should be more focused on changing this image, Central Bank Governor Riad Salameh told The Daily Star in an interview Wednesday.

However, Salameh stressed that despite the negative ratings, the Finance Ministry and the Central Bank had no difficulty swapping all the maturing bonds in 2013 at reasonable rates and yields.

According to Salameh, Lebanon cannot exceed the $2 billion Eurobond ceiling unless the Parliament authorizes the Cabinet to issue more bonds this year.

Lebanese banks usually snap up most of the sovereign bonds issued by the government and Salameh stressed that local lenders had shown interest in swapping the bonds.

Salameh said he had urged the government and the Finance Ministry to reduce the deficit-to-GDP and debt-to-GDP ratios to help improve Lebanon's credit rating.

Salameh defended the GDP growth estimate of the Central Bank, insisting that these estimates had been well studied by the research department.

Salameh reiterated that the Central Bank would continue its successful monetary policy.